- The Fed cuts rates- Precious metals post across the board gains
- Trade remains a critical issue- Copper edges lower
- Oil moves a touch lower, but natural gas posted a double-digit percentage gain as the withdrawal season approaches
- Grains do not move much- A mixed bag in other agricultural commodities
- The November WASDE report on November 8
The story of this week:
The Politics of Crude Oil and Natural Gas Could Be Complicated In 2020
One of the issues that markets across all asset classes will face in 2020 is the potential for a significant shift in US policy. Over the past years, the United States became the world’s leading producer of crude oil. According to the EIA, US output now stands at 12.6 million barrels per day. In natural gas, massive discoveries of the energy commodity in the Marcellus and Utica shale regions of the US and regulatory reforms have increased the supply side of the fundamental equation. Replacing coal with natural gas together with LNG exports has expanded the demand side of the equation for the commodity.
The 2020 Presidential election will determine the future path of energy policy. The next administration and the political majorities in the House of Representatives and Senate starting in 2021 could see a significant political shift. The incumbent administration has been highly supportive of energy independence. Meanwhile, the opposition party has been embracing the “Green New Deal,” which has significant ramifications for US energy output.
The latest polls indicate that Senator Elizabeth Warren has a chance of capturing her party’s nomination to challenge President Trump for the presidency. She has pledged that her administration would ban fracking on day-one in the oval office. The rising support for progressive policies could inject substantial volatility into the energy futures markets over the coming year. We could see oil and gas prices move significantly with political polls.
For decades, the leadership of the US has strived for energy independence from the Middle East. The adoption of the “Green New Deal” with broad legislative initiatives would change the fundamentals for oil and gas markets in the US and around the globe. At the same time, dramatic changes in tax policies would ripple through markets across all asset classes like a tsunami.
When it comes to the world of energy, volatility is likely to increase if the potential for a progressive agenda in the US rises over the months ahead.
The chart shows that quarterly historical volatility in the NYMEX WTI crude oil futures market has ranged from 12.63% to 92.77% since 1985. At 36.5%, on November 1. At 36.5% it is closer to the bottom than the top end of the range.
Meanwhile, at 16.82%, quarterly price variance in the natural gas futures market is also closer to the lows than the highs. The range in price variance in natural gas futures has been from 12.05% to over 80%.
The 2020 election season could be the most contentious in US history. This week, the House of Representatives voted to proceed with an impeachment inquiry against President Trump. We could be on the verge of a period of extreme volatility in energy markets based on the uncertainty surrounding future policy initiatives. Fasten your seatbelts. The markets are likely to move higher and lower with the polls over the next year as US voters will ultimately determine the future of energy production and the environment among a host of other issues. Volatility creates opportunity. While higher price variance creates a paradise for traders, it can be a nightmare for investors. The poor performance of energy-related equities over the past months could be a sign of uncertainty and future price swings that could be extreme.
The Fed cut rates by 25 basis points for the third time this year. The central bank will now watch trade and Brexit for direction at the final meeting of the year in December. Friday’s employment data was another sign that the economy continues to grow at a moderate pace.
Highlights in commodities:
- December gold moves 0.41% higher as the market still settles above $1510 per ounce
- December silver rises by 0.70% on the week as the precious metal settled at over $18 per ounce
- Platinum posts a 2.22% gain on the week. January platinum was at a $557.40 per ounce discount to December gold futures, which narrowed since last week
- Palladium moved 2.30% higher for the week as it rose to a new high at $1799.20 per ounce
- December copper edged 0.84% lower as the price moves to the $2.6530 level
- December iron ore futures moved 2.25% lower on the week
- The BDI falls 3.03% since October 25 to the 1731 level
- January Rotterdam coal moves 0.67% lower since last week
- January lumber rises 0.68% since October 25 to $412.80
- December NYMEX crude oil moved 0.81% lower since October 25
- December Brent crude oil rolls to January and moved 0.06% lower since the previous report as Brent outperformed NYMEX crude oil
- The premium for Brent over WTI in January closes Friday at the $5.42 level
- December gasoline moved 1.23% higher while December heating oil futures fell 1.91% over the past week
- The gasoline crack spread in December was 13.35% higher while the December heating oil crack moved 4.37% to the downside since October 25 as refining margins ignored seasonal factors
- Natural gas rose 10.37% on December futures closing the week at $2.714 per MMBtu after reaching a low at $2.388 on October 11. The EIA reported an injection of 89 bcf into storage on Thursday for the week ending on October 25 as the withdrawal season approaches
- December ethanol moves 0.90% higher on the week
- January soybeans were unchanged since last week
- December corn rose 0.65% on the week
- CBOT December wheat declined 0.34% since last week. December KCBT wheat trading at a 90.00 cents discount under December CBOT wheat. The discount moved towards the historical norm by 5.00 cents since last week
- March sugar rose 1.05% since October 25
- December coffee rose 4.58% on the week
- December cocoa rose 1.77% since last week
- December cotton fell 1.03% since October 25
- January FCOJ futures declined 2.08% since last week’s report
- December live cattle gained 2.97% since last week
- January feeder cattle were 3.11% higher since October 25
- December lean hog futures moved 0.73% lower over the past week
- The December dollar index futures contract fell 0.57% on the week
- December Long-Bond futures trading at 161-00 up 1-18 for the week as the Fed cuts rates
- The Dow Jones Industrial Average closes at 27,347 on Friday, November 1, up 389 points from October 25. The S&P 500 rose 1.47% since last week. The VIX fell 0.35 and was trading at around 12.30 on Friday as stocks rise to new highs
- Bitcoin was trading at $9,237.46 on Friday up $607.03 or 7.03% since October 25. Bitcoin continued to post gains over the past week
- Ethereum was trading at $185.03 on Friday, up 2.28% since the last report
Price Changes for the week:
DBC closes at $15.61 per share, unchanged since October 25
DBC is the Invesco DB Commodity Tracking product which represents a diversified basket of commodities futures contracts, has net assets of $1.41 billion and trades an average daily volume of 1,019,573 shares. The fund summary for DBC states that it holds a diversified group of commodities futures but is weighted towards energy. The average volume and net assets were stable over the past week along with the price of the ETF.
Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.